Market Strategy Radar Screen Weekly January 22, 2018

How Long Has This Been Going On?

Stocks rising on a nearly daily basis so far this year cause traders and investors to ponder

Three weeks into the year and major global equity benchmarks show stocks posting weekly gains and new record highs for three consecutive weeks. Some market observers have expressed concern and are calling the recent action in stateside stocks a market “melt-up.” At this time we see not so much a melt-up as a market “catch-up” with developments that appear more positive than negative for equity performance.

Though it’s very early into the Q4 earnings season revenues and earnings so far are broadly showing continued improvement. The first indications (garnered from company calls, analyst reports and investor responses) are that the new tax reform package looks positive for most companies (and for some not immediately, but over the near term). Another factor likely contributing to recent gains in the equity markets has been in our opinion the beginning of a process of capitulation by some bull market skeptics and bears.

Economic data persists in signaling sustainable economic growth stateside and positive growth abroad across the regions of the world. Even as growth improves inflation remains at levels more “reflationary” than “inflationary” making the Fed’s role easier to manage.

While politics, geopolitics and uncertainties of all ilk abound and signal that not everything is “a bed of roses,” business conditions and the outlook for moderate growth appear good. Sustainable economic growth along with revenue and earnings growth historically are key ingredients for making stocks attractive to investors. Until fundamentals show signs of deterioration a positive environment for stocks is likely to persist.

With inflation rising at a pace below the Fed’s target rate, that institution’s goal—to normalize interest rates without sending the economy into a tailspin—continues to appear to us achievable if not quite yet at hand just shy of nine years after the Great Recession ended.

Last week the Dow Jones Industrial Average closed above 26,000 mid-week to reach yet another record high. While the distance from 25,000 to 26,000 spanned just eight trading days, the actual percentage gain (4%) was not quite as striking as the fanfare around the benchmark’s arrival at its new plateau. Still the arrival at that latest watermark level caused at least some investors to question just how much higher the current upside streak could last.

The gains so far haven’t been limited to large cap stocks but have been spread across market capitalizations and across borders. Last Friday the S&P 500, the S&P 400 (mid-caps), the Russell 2000 (small caps), the tech laden NASDAQ Composite as well as MSCI EAFE (developed markets ex-US and Canada), and MSCI Emerging markets all closed at respective record highs. The Dow Jones Industrial average and the MSCI Frontier markets closed slightly below their latest record levels achieved earlier last week.

We found it interesting that the consecutive weekly gains posted by the aforementioned markets showed a slowing in these gains from week to week for six of the eight benchmarks—indicating to us that an element of buyers’ fatigue may be settling in even while what some pundits coined “FOMO” (Fear of Missing Out) remains trending.

The respective weekly gains posted by the major indices so far in 2018 are as follows:

We expect that equity markets will continue to seek out catalysts for the direction they will take next. So far in these first few weeks of 2018 that direction has pointed higher. Time will tell.

News Crossing the Tape Late Evening on Sunday

On Sunday night as we went to press with this week’s edition of the MSRS news crossed the tape that the Senate failed to end the government shutdown which began at midnight last Friday. We expect that the overhang of this year’s mid-term election in November will provide increasing pressure on Washington D.C. politicians from both sides of the aisle the longer the issues that led to the government shutdown remain unresolved.

That said, it’s worth noting that the last shutdown of the US government in 2013 took place from October 1 through 16. In that period the S&P 500, the S&P 400 (mid caps), the Russell 2000, the NASDAQ Composite and the Dow Jones Industrials respectively advanced 1.57%, 0.54%, 0.46%, 0.56% and 1.20%.

In 2013 those same indices respectively advanced: 29.6%, 31.6%, 37%, 38.32% and 26.5% for the full year notwithstanding the effects of a 16-day government shutdown as well as an unrelated jump in the yield of the 10-year Treasury note which went from a low of 1.63% in early May of that year to 3.03% on December 31 of that year.

While this week could see markets react negatively to the current shutdown, we are planning to avoid jumping to conclusions as news from Washington, DC grabs some degree of the markets’ attention.

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